A worker turns a valve at the Rosneft oil refinery in Tuapse at the Russian Black Sea coast September 6, 2006.SERGEI KARPUKHIN/Reuters
The global oil industry is still banking on production gains this year, despite tens of billions of dollars in capital spending cuts, showing crude prices will have to fall much lower before companies are forced to start turning off taps.
U.S. crude will likely have to dip under $40 (U.S.) per barrel before producers begin shutting down production, says BMO Nesbitt Burns Inc. Indeed, corporate budgets still reflect crude at $61 a barrel, the bank says, pointing to the need for further cuts to spending to protect companies' balance sheets if prices remain mired below that level.
West Texas Intermediate oil was up $1.71 at $52.92 a barrel on Friday. BMO has a 2015 WTI forecast of $51.
BMO analyst Randy Ollenberger wrote in a report that he expects a 6 per cent increase in output above 2014, or 1.3-million barrels a day, among the global energy companies the bank covers.
Meanwhile, a U.S. government report this week showed oil inventories in the United States at a record level. Mr. Ollenberger said he sees a global oversupply of crude amounting to 1 million barrels a day this year, showing the need for the industry to lower output beyond the levels currently predicted.
"We believe oil prices could be pushed lower in the near term, possibly testing the $40-a-barrel level, in order to force producers to shut in production and take physical supply off the market," he wrote.
BMO's report adds to several bearish forecasts on oil prices released this week. Citigroup analyst Ed Morse said it is impossible to call the bottom in the oil market, and that the oversupply could push the price to as low as $20 a barrel for a temporary period.
As recently as last summer, a barrel of oil sold for more than $100. Since then a combination of shaky global demand and growing production, especially in the United States, has prompted the deepest market fall since the financial crisis.
Recent corporate reports show Canadian producers still planning to at least maintain short-term output despite sharp reductions in capital spending.
Cenovus Energy Corp. expects to produce up to 195,000-212,000 barrels of oil a day this year, compared with 203,500 in 2014. Husky Energy Inc. is targeting total production of 325,000-355,000 barrels of oil equivalent a day, compared with 340,000.
BMO estimated budget cuts of $150-billion to $200-billion worldwide this year.